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January 4, 2013

Tax Law Leaves Charitable Deduction Intact

Pease limitation on deductions made permanent

The American Taxpayer Relief Act of 2012, passed by Congress at the eleventh hour and counting, preserved the charitable deduction, much to the relief of the philanthropic and nonprofit sector.

A number of organizations claimed some credit for educating legislators about the importance of charitable giving in the lead-up to the vote. But the Council on Foundations noted that the legislation was only a first step toward more comprehensive tax reform.

“Your voice will be critical in 2013 as the 113th Congress considers comprehensive tax reform that could include alterations to the charitable deduction,” the organization told its members in a statement after the bill passed.

For now, the good news for the sector is that the bill placed no cap on charitable deductions. These will continue to be coupled with an individual’s or household’s corresponding tax rate.

The bill also extended the IRA charitable rollover through Dec. 31. This provision permits tax-free distributions to an eligible charity from an IRA held by someone 70½ or older of up to $100,000 per taxpayer, per taxable year.

The provision includes two transition rules to allow donors to make 2012 contributions:

Individuals who received an IRA distribution in December 2012 can elect to count that distribution (or a portion of it) as a 2012 IRA charitable rollover if they transfer the amount in cash to an eligible charity before Feb. 1.

Donors can make distributions directly to eligible charities before Feb. 1, and elect to have such distributions treated as qualified charitable distributions in 2012. The council said this change may in particular benefit donors who want to take advantage of the rollover in both 2012 and 2013.

Another provision was met with less enthusiasm from charities. The new bill permanently extended the so-called Pease limitation on itemized deductions, which institutes a phaseout of itemized deductions—including those for charitable giving, mortgage interest, and state and local taxes—for taxpayers with adjusted gross income above a certain level.

According to the council, itemized deductions for higher income taxpayers in 2013 will be reduced by the lesser of the following:

3% of the amount by which the taxpayer’s income exceeds $250,000 for individual filers, $275,000 for heads of households or $300,000 for married couples filing jointly (these amounts are adjusted annually for inflation)

80% of the value of the taxpayer’s itemized deductions.

The Alliance for Charitable Reform in a statement said it was “disappointed that the Pease provision was made permanent in this agreement, which will progressively limit deductions, including the charitable deduction.

“We encourage members of Congress and the president to continue to preserve the charitable deduction and revisit Pease as it relates to charitable giving as we move forward into both tax reform and measures to address the federal deficit.”